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Brexit: A Global Wave of Shock and Awe

Published: Jun 30, 2016

Brexit: A Global Wave of Shock and Awe

The United Kingdom (U.K.) surprised the world with its populous vote on June 23, 2016 to “Leave” the European Union (EU).  Stock markets took an immediate but short-lived drop around the globe as did the value of the British Pound. The UK’s Prime Minister announced his resignation, Britain’s Triple-A credit rating was immediately downgraded and speculation about what it all will mean when (or if) the exit actually occurs flooded the internet.

Emotions were obviously high.  If “Leave” supporters could have foreseen this shakeup, how many would have changed sides in the 52% to 48% vote?  While it is difficult to assess, one prominent Brexit campaigner stated, “When I put my cross against leave I felt a surge as though for the first time in my life my vote did count.  I had power,” Kelvin MacKenzie, the former editor of the Sun, Britain’s biggest-selling newspaper, wrote on Monday.  “Four days later, I don’t feel quite the same.  I have buyer’s remorse.  A sense of be careful what you wish for.  To be truthful I am fearful of what lies ahead.”

A June 27 article in the New Yorker opens with, “There are reasons to doubt whether last week’s decision by British voters to leave the European Union…will ever be implemented.”  The article continues, “If and when the U.K. government invokes Article 50 of the Lisbon Treaty of 2007…there will be at least two years of negotiations about the terms of Britain’s future relationship with Europe.  And the invocation of Article 50 is likely to be delayed for quite a while.”

But…What If?

Just days after the initial “Shock and Awe”, markets began to stabilize, but countries and companies, who perhaps in their wildest dreams did not imagine the “Leave” vote would actually win, are waking up to a potential new reality and are exploring the “what if” strategies they may need to pursue.

The following relocation-based observations were taken from a Member Alert issued by Worldwide ERC® on Monday, June 27, 2016:

The biggest change issue is immigration law, where the U.K. will most likely:

  • Discard EU free movement rules and introduce new controls on EU migration into the U.K. similar to non-EU work visas

    • Positive impact: reduced pressure on public services and housing; slightly less downward pressure on semi/unskilled wages

    • Disadvantages:  reduction in supply of EU migrant labor for sectors such as food processing, hospitality and construction; EU “free movement” tied to people, goods, services and capital, which may impair the U.K.’s ability to negotiate satisfactory terms on three of the four categories; financial services industry may take the biggest hit in its ability to conduct business to the EU market

  • Remain in the EU until the withdrawal process has been completed

    • Status Quo for current EU nationals in the U.K. or British citizens working in the EU as of June 23, 2016

    • According to Berry Appleman and Leiden LLC (BAL) it is possible that those who have lived and worked in the U.K for less than five years by the time disengagement is completed will need to apply for permits to continue living and working in the U.K.

    • It was suggested that individuals who qualify for permanent residence should start the process immediately—five years residency in the U.K.  However, these added applications may burden the Home Office and cause processing delays

EU “Directives” influenced a number of laws which were created in the U.K. including:

  • Employment laws such as the Transfer of Undertakings (Protection of Employment) and Working Time rules

    • Brexit has no direct impact on these employment rights, but a future U.K. Government will have the ability to amend or repeal such legislation

  • Data Protection, which was previously covered by Safe Harbour, and subsequently ruled invalid by the European Court of Justice (ECJ), is being replaced with the General Data Protection Regulation (GDPR) in May of 2018

    • The U.K.’s Information Commissioner’s Office (ICO) published a statement following the Brexit vote that the GDPR will not directly apply to the U.K., but indicated that the U.K. wants to trade with a Single Market on equal terms and will have to prove “adequacy” of its data protection rules by May 2018

  • Anti-bribery legislation will be covered  by the U.K. Bribery Act and will not be affected by Brexit

  • Tenancy law in the U.K. is not affected by EU membership, so no change is needed

  • VAT is an EU-wide tax, which the U.K. adopted at accession in 1973.   How it will apply to importers and exporters in the future will be part of the EU-U.K. negotiations

  • Direct taxes such as income tax and corporation tax are not subject to EU regulation

  • EU- Cross-Border Pension Schemes are not anticipated to experience great changes

Businesses Headquartered in the U.K.

About 50 percent of all multinational corporations operating in the EU are headquartered in the U.K.  This is the biggest cause for concern because pending the outcome of negotiations, free trade between the U.K. and the EU could be greatly impacted.  There is a lot of chatter about major corporations relocating their headquarters to Ireland, France, Germany or the Netherlands.

Questions that U.K. companies should be asking themselves at this point include:

  • Do we have EU employees who are working in U.K. offices and vice versa?

  • Are the services that we provide dependent on EU passport compliance requirements or dual recognition of qualifications or standards?

  • Do our product sales or supply chains touch the EU or other countries that share trade agreements with the EU?

If you answered yes to any of the above questions, then Brexit could impact your business in the near future.  Steps you can take to prepare for a worst case scenario include:

  • Create a list of potentially affected employees in the EU and U.K.

  • Determine which employees are eligible to apply for permanent residence under local rules and start the process to avoid Brexit challenges down the road

  • Minimize employee anxieties with information to the potentially affected team members

  • Assess the potential impact to your business and explore alternate solutions so you have time to prepare

  • Consider challenges you could potentially face in recruiting necessary talent

In Summary

“Brexit is a classic illustration of the law of unintended consequences,” stated Henry Kissinger, former U.S. Secretary of State, in a recent Wall Street Journal article. “Britain will want to maintain extensive ties with Europe while lifting or easing the constraints of its many legislative and bureaucratic requirements.  The EU leadership has almost the opposite incentive.  It will not wish to reward Britain’s Leave majority by granting Britain better terms than it enjoyed as a full member.”

Brexit has the potential for creating great uncertainty and a long-term, volatile environment as we journey through this unchartered territory.  NEI will monitor the situation as new developments arise that could affect our clients’ relocation programs.